MODEL PROXY VOTING GUIDELINES

Transcription

1 2017 MODEL PROXY VOTING GUIDELINES R E S P O N S I B L E I N V E S T M E N T F O R A S U S T A I N A B L E E C O N O M Y

2 Canadian Shareholder Association for Research & Education 2017 Shareholder Association for Research and Education 26th Floor, 1055 West Georgia Street Vancouver, BC V6E 3R5 P (604) F (604) ISSN: (Print) ISSN: X (Online) Disclaimer: These guidelines are provided as a model for pension funds in developing their proxy voting policies and procedures. They are not to be taken as legal advice. Pension funds are strongly advised to seek independent legal and financial advice in developing their proxy voting procedures to best suit the interests of their plan members. ABOUT SHARE SHARE is a Canadian leader in responsible investment services, research and education for institutional investors. Since its creation in 2000, SHARE has carried out this mandate by providing active ownership services, including proxy voting and engagement, education, policy advocacy, and practical research on issues related to responsible investment. Our clients include pension funds, mutual funds, foundations, faith-based organizations and asset managers across Canada. SHARE s leadership on responsible investment is both national and international. SHARE is a signatory to the United Nations Principles for Responsible Investment (UN PRI) and a Global Reporting Initiative (GRI) Organizational Stakeholder. SHARE also coordinates the Secretariat of the Global Unions Committee on Workers Capital (CWC). ABOUT THESE GUIDELINES These guidelines have been developed by SHARE as a model for use by Canadian pension funds. The guidelines are written in the first person [the fund] to make them similar to guidelines that would be adopted by a board of trustees. In addition to having a set of proxy voting guidelines, pension funds should ensure that plan documents provide the appropriate authority for trustees to execute or delegate the execution of their voting rights and that procedures for proper accountability are in place. For information about incorporating proxy voting policies into plan documents, please refer to the SHARE publication How to Incorporate Active Trustee Practices into Pension Plan Investment Policies. More information about proxy voting is available at

3 ACKNOWLEDGEMENTS The Shareholder Association for Research and Education owes thanks to the many individuals and organizations that assisted us in the preparation and revisions of these model proxy guidelines. Financial support for the original guidelines was provided by the Columbia Institute and the Atkinson Foundation. The staff of many investment managers, pension funds, and pension organizations assisted in the creation of the original guidelines by generously answering our requests for information. A list of sources is provided in the references section, page 53. SHARE especially thanks the members of our Proxy Voting Guidelines Advisory Committee, who have provided us with invaluable advice and guidance on the guidelines. They are: Dermot Foley, Manager, ESG Analysis VanCity Investment Management Ltd. Neil Watson, Vice President and Portfolio Manager Leith Wheeler Investment Counsel Ltd. Jason Milne, Corporate Governance Analyst Phillips, Hager & North Investment Management Ltd. Jackie Cook, Founder Fund Votes Bill Mackenzie, Senior Advisor Hermes Equity Ownership Services Karen Shoffner, President Castellan Capital Management The views expressed in this document are those of SHARE and do not necessarily reflect the views of the members of the advisory committee, their organizations, or their affiliates. CONTENTS Acknowledgements 3 GENERAL PRINCIPLES 6 Proxy voting responsibilities 6 Duties of loyalty and care 6 Application of these guidelines 6 Retention of voting authority 7 Annual review of guidelines 7 INSTRUCTIONS FOR VOTING PROXIES 8 Reporting requirements and transparency 8 CORPORATE GOVERNANCE 9 General guidelines 9 Amendments to articles of incorporation or articles of association 9 Approval of second or casting votes 9 Approval of other business 10 Adjournment of a meeting to solicit votes 10 Allocation of profits and/or dividends 10 Scrip dividend alternative 10 Approval of the transfer or use of reserves 10 Approval of legal formalities 11 Capital Structure 11 Share issuances 11 Pre-emptive rights 11 Waiving pre-emptive rights 11 Issuances of blank-cheque preferred shares 12 Share buybacks or repurchases 12 Reissue of repurchased shares 12 Stock splits and reverse stock splits 13 Unequal voting shares and dual classes of shares 13 3 MODEL PROXY VOTING GUIDELINES 2017

4 Boards of directors 13 Voting for directors 14 Independent boards of directors 14 Definition of an independent director 15 Independent chair of the board 16 Independent lead directors 16 Key board committees 16 Independent audit committee 16 Independent compensation committee 16 Independent nominating committee 17 Corporate governance committee 17 Statutory auditors 17 Supervisory boards 17 Committees of supervisory boards 18 Shareholder nominations for director 18 Advance notice requirements 19 Majority vote for elections of directors 19 Elections for individual directors 20 Contested elections for directors 20 Term limits for directors 20 Directors ability to devote sufficient time and energy: Attendance 20 Diversity on boards of directors 20 Classified boards/staggered terms for directors 21 Cumulative voting 21 Cumulative voting and majority elections for director 21 Size of boards of directors 22 Director indemnification 22 Ratification of the acts of the board and/or auditors 22 Director compensation 22 Directors share-based compensation 23 Retirement benefits, severance pay, or incentive pay for directors and statutory auditors 23 Disclosure of directors compensation 23 Auditors and financial reports 24 Auditor independence and the appointment of auditors 24 Disclosure of audit fees 24 Approval of auditors fees 24 Rotation of auditors 24 Certification of financial statements 24 Approval of financial reports 25 Appointment of the auditor and financial restatements 25 Auditors liability 25 Executive compensation 25 Compensation consultants 25 Executive compensation and performance 26 Performance-based compensation and restated financial reports 26 Executive compensation during layoffs 26 Executive performance and corporate social responsibility 27 Performance evaluation periods 27 Executive compensation and employee wages 27 Approval of compensation committee report and/or compensation policies 28 Annual approval of compensation reports or plans 28 Disclosure of executive compensation 28 Share-based compensation 29 Expiry 29 Dilution 29 Grant rate 29 Reload grants 29 Automatic replenishment features 29 Evergreen awards 30 Vesting 30 Stock options 30 Price 30 Repricing 30 Timing 31 Restricted shares 31 Share subscription rights (Japan) 31 Other kinds of share-based compensation 31 Omnibus share-based compensation plans 31 Concentration of share-based compensation 32 Awards for consultants and contractors 32 Company loans for stock purchases 32 Change-in-control provisions 32 Severance benefits 32 Exceeding regulatory limits on severance 33 Tax gross-ups 33 Compensation caps 33 Takeover protection 33 Shareholders approval of takeover defences, mergers, and acquisitions 34 Poison pill takeover defences 34 Shareholder rights plans 34 MODEL PROXY VOTING GUIDELINES

5 New share subscription rights and stock warrants as poison pill takeover defences 35 Other variations on poison pill takeover defences 36 Crown jewel defence 36 Private and targeted share placements 36 Opting out of takeover laws (United States) 36 Reincorporation 36 Greenmail 36 Fair-price proposals 37 Miscellaneous takeover defences 37 Considering the effects of takeovers and mergers 37 Protection of shareholders rights and interests 37 Exclusive forum proposals 37 Supermajority vote requirements 37 Omnibus or linked proposals 37 Confidential voting 38 Related-party transactions 38 Quorum requirements for shareholders meetings 38 Shareholder-called meetings 38 Shareholder proposals 38 Shareholder action by written consent 39 Shareholders meetings 39 Shareholders voting rights 39 Dangerous products and product liability 45 Genetically modified organisms 45 Environmental issues 46 Climate change 46 Hydraulic fracturing 47 Water use management 47 International operations 47 Labour practices 47 Human rights 48 Operations in zones of conflict 48 Freedom of expression and electronic censorship 49 Monitoring of foreign contractors 49 Endnotes 50 REFERENCES 53 Other corporate governance issues 40 Employee share-ownership plans 40 Approval of inter-company contracts 40 CORPORATE SOCIAL RESPONSIBILITY 41 General guidelines 41 International standards and norms 41 Reports on social and environmental issues 42 Labour rights 42 Workplace practices 42 Layoffs and reductions in force 43 Discrimination in employment 43 Workplace health and safety 43 Animal welfare 44 Relationships with communities 44 Obtaining approval from local communities social license to operate 44 Political contributions and positions 44 Predatory lending 45 Reincorporation, tax evasion and tax avoidance 45 5 MODEL PROXY VOTING GUIDELINES 2017

6 GENERAL PRINCIPLES PROXY VOTING RESPONSIBILITIES [The fund] manages its assets in a manner that will provide benefits to plan participants and their beneficiaries over a span of many decades. Consequently, [the fund s] actions must support these parties long-term interests. Equities held by [the fund] usually carry voting rights. Voting rights are valuable assets of [the fund]. Trustees have an obligation to ensure that shares owned by the plan are voted in a way that supports the interests of the plan s participants over the long term. Duties of loyalty and care The trustees of the fund and anyone appointed to vote proxies on the trustees behalf have a duty of loyalty to exercise their proxy voting authority solely in the interests of the plan s participants and beneficiaries. They have a duty of care to exercise their proxy voting authority with the prudence, skill, and diligence that a prudent person would exercise in managing the property of others. Failing to vote the plan s shares, voting without consideration of the effects of the vote, or voting arbitrarily with or against management violates these duties. Those who are responsible for voting [the fund s] shares also have a duty to take reasonable steps to ensure that they receive and act on the proxies for all of [the fund s] shares in a timely manner. APPLICATION OF THESE GUIDELINES [The fund] will vote its proxies in accordance with these proxy voting guidelines. In deciding how to apply the guidelines, [the fund] will consider the circumstances of each vote as well as the general principles contained in these guidelines. The overarching principle in interpreting and applying these guidelines is to follow the course of action that will best serve the long-term interests of plan participants and their beneficiaries. Voting decisions may deviate from these guidelines if doing so would best serve participants interests in the long term. If questions arise about the application or interpretation of these guidelines for any issue, they should be resolved in consultation with [the fund s] trustees. [The fund] will vote in a manner that is consistent with the duties of loyalty and care, and that supports implementation of current best practices in corporate governance and social responsibility. Above all else, [the fund] will always vote in the best longterm interests of its participants and their beneficiaries. [The fund] will not attempt to manage companies by shareholder referendum, and will ensure that any attempts to influence a company do not harm its financial viability. MODEL PROXY VOTING GUIDELINES

7 GENERAL PRINCIPLES RETENTION OF VOTING AUTHORITY In cases where [the fund] delegates its voting authority to external investment managers or a proxy voting service, it reserves the right to direct the vote on any particular resolution or issue. ANNUAL REVIEW OF GUIDELINES The standards for corporate governance and corporate social responsibility evolve over time. There is growing acceptance of the view that shareholders interests must be considered along with those of a company s other stakeholders, such as its employees, creditors, suppliers, and the citizens of the community where it operates, as well as the environment, in order to sustain long term profitability. This shift in the view of shareholders role in the company is consistent with the perspective of long-term shareholders and with the inclusion of environmental, social and governance issues into investment decision-making. Corporate governance standards are evolving accordingly. [The fund] will continue to monitor changes in corporate governance as these standards change and update these guidelines to reflect those changes. These guidelines will be reviewed, updated, and approved by [the fund s] investment committee on an annual basis. 7 MODEL PROXY VOTING GUIDELINES 2017

8 INSTRUCTIONS FOR VOTING PROXIES [We encourage funds to put their instructions or procedures for voting proxies in this section of the guidelines. Instructions and guidelines vary greatly from fund to fund, depending on the extent to which responsibility for proxy voting is delegated, and how and to whom it is delegated. For more information and guidance on proxy voting procedures see Putting Responsible Investment into Practice: A Toolkit for Pension Funds, Foundations and Endowments at 1 Any investment manager or adviser who, under the terms of a contract, is responsible for voting shares held by [the fund] is expected to follow these proxy voting guidelines in making voting decisions. Where the guidelines call for decisions to be made on a case-by-case basis, voting agents should base their decisions on what would best serve the plan s participants in the long term. If a voting agent believes the interests of participants would be best served by deviating from the guidelines, [the fund s] trustees should be consulted before such a vote is cast. REPORTING REQUIREMENTS AND TRANSPARENCY [The fund] will make these guidelines available on request to all companies in which we invest, to any plan participant, and to the public. [The fund s] full voting record is available on our website and by request. Where voting decisions have been delegated, trustees must monitor these voting decisions as part of their duty to manage the fund in the best interests of the plan members. The fiduciary responsible for voting should report regularly to the trustees on how he or she has voted each proxy. This report should include a written account of the reason [the fund] authorized any vote that deviates from these guidelines. [The fund] s trustees and their voting fiduciary will agree on the details, timing, and frequency of these reports at the beginning of the fiduciary s contract, and they will review their agreement annually. MODEL PROXY VOTING GUIDELINES

9 GENERAL GUIDELINES The standards for good corporate governance around the world tend to be more alike than are the legal requirements and norms for corporations in different countries. [The fund] will not ignore the laws and norms of the countries in which companies operate, but it has chosen to apply these guidelines consistently in all countries. In those cases where [the fund] intends to address an issue that appears only in certain jurisdictions or to apply different standards based on jurisdiction, this is stated in the relevant guideline. Good corporate governance is based on the relationships between a company s board of directors or supervisory board, its management, and it s other stakeholders, including its shareholders, employees, and the citizens of the countries where it operates. The board controls the company s assets and actions, and it is responsible for overseeing the work of management. Shareholders, as the providers of the company s equity capital, have an important role to play in the company s viability. They elect the board, and have other rights that give them a voice in certain aspects of the board s operations. The relationships among these bodies are key to a company s long-term success. Amendments to articles of incorporation or articles of association All major changes in a corporation should be submitted to a vote of the shareholders. Proposals to amend a corporation s articles of incorporation or association are often made in response to changes in the rules, laws, or regulations affecting the corporation, such as changes in stock exchange listing rules. Most of these changes are technical or administrative matters that will not affect shareholders interests. However, the wording of these amendments must be carefully considered because some small changes in the wording of an article can have a significant effect on corporate governance. Management often combines multiple amendments into a single item to be voted on in the proxy ballot. This makes it impossible for shareholders to approve some amendments while voting against others. [The fund] encourages companies to give shareholders the opportunity to vote separately on all amendments. See the guideline Omnibus or Linked Proposals, page 37. [The fund] will assess proposals to amend articles of incorporation or articles of association on a case-by-case basis, with primary consideration given to how they affect the company and its stakeholders in the long term. In cases where shareholders must vote on a group of amendments as one ballot item, [the fund] will vote against the entire group of amendments if it is opposed to any of the amendments. Approval of second or casting votes Some companies include in their bylaws a provision that allows the chair of the board or of a committee to cast the deciding vote on an issue if there is a tied vote at a meeting of shareholders, a board meeting, or committee meeting. This additional vote is called a casting vote or a second vote. [The fund] is opposed to this practice, because it gives the Chair of the board or committee one vote more than other directors or shareholders. [The fund] will vote against amendments to bylaws or articles if they include a provision for a casting vote or second vote to decide tied votes at the meetings of shareholders, the board, or board committees. 9 MODEL PROXY VOTING GUIDELINES 2017

10 Approval of other business Sometimes companies include the approval of other business as an item on the proxy ballot without specifying what the other business consists of. [The fund] believes that approval of such items gives the company broad discretion to act without specific shareholder approval on issues that would otherwise require such approval. [The fund] will vote against the approval of unspecified other business. Adjournment of a meeting to solicit votes Companies will sometimes ask shareholders for their approval to adjourn a shareholders meeting to allow the company to solicit more votes in favour of one of its proposals. This usually occurs at special meetings when the proposal at issue is a merger or acquisition. [The fund] is generally opposed to adjournments for this reason. Shareholders votes become meaningless if the company can keep soliciting votes until it gets the outcome it wants. However, there may be circumstances in which it is reasonable for the company to make this request. [The fund] will vote against proposals to adjourn a meeting of shareholders for the purpose of allowing the company to solicit more votes in favour of its proposals, unless there is a compelling reason to vote for it. Allocation of profits and/or dividends Outside of North America, many companies must have the approval of their shareholders to allocate their profits between dividends, compensation for the directors and statutory auditors, and other uses. The amount of dividend that is appropriate depends on the size, maturity, and profitability of a company. Companies that are large, mature and have a fairly consistent income should have a payout ratio of approximately 30%. [The fund] will approve these profit allocation proposals unless the dividend payout ratio is consistently low for size, maturity, and profitability of the company, and the company provides no explanation for the size of its dividends. [The fund] will also oppose dividends that are higher than the company s financial position warrants. When a company s proposed dividend is higher than the company s total annual profit, [the fund] will vote case by case, based on the company s ability to maintain sustainable operations. [The fund] will vote against dividend or profit allocations if the dividend payout ratio too small for the size, maturity and profitability of the company and the company has not provided an adequate explanation for the lower amount. [The fund] will vote against dividend or profit allocations if the dividends are too high to allow the company to continue to operate sustainably. Scrip dividend alternative Companies in some jurisdictions may give shareholders a choice of taking their dividend in additional shares instead of cash. This is called a scrip dividend. Scrip dividends allow the company to keep more of its cash in retained earnings, which may improve the value of the company in the long term. Scrip dividends may also give shareholders certain tax benefits. However, shareholders should be allowed to receive their dividend in cash if they prefer. [The fund] will vote for scrip dividend proposals as long as shareholders also have the option of receiving the dividend in cash. Approval of the transfer or use of reserves Normally, a company that pays dividends and has a financial loss in a given period will pay a lower dividend or withhold dividend payments for that period. However, some companies have a policy to make all dividends the same or nearly the same amount. This is called a stable dividend policy. Companies with such a policy may use some of their reserves to pay the dividend, or, if shareholders approve, transfer reserve funds to other accounts in order to cover some of their losses. Shareholders should view this practice with caution. Using reserves to pay a dividend is not necessarily harmful if it is done infrequently. Companies may also set up special reserve funds for the purpose of paying dividends that do not affect their legal reserves. However, companies should not damage their long-term financial viability to pay a dividend. If a company is losing money regularly or losing substantial amounts, and if the losses are due to strategic management problems or an economic downturn, the use of reserves to pay dividends is not justified because it threatens to deplete the company s reserves. [The fund] will vote against proposals to transfer reserve funds or use reserves to pay dividends if financial losses have made this use of reserves necessary and the losses are regular, substantial or due to strategic problems within the company. [The fund] will vote against proposals to transfer reserve funds or use reserves to pay dividends if the company has also used reserves to pay dividends in both of the last two years. MODEL PROXY VOTING GUIDELINES

11 Approval of legal formalities These proposals ask shareholders to give management the authority to complete any formalities needed to validate the decisions made at shareholder meetings. [The fund] will vote for proposals to approve legal formalities. CAPITAL STRUCTURE Share issuances (See also Unequal Voting Shares and Dual Classes of Shares, page 13.) [The fund] recognizes that directors need the flexibility to issue shares to address a company s financial needs and conditions. However, it does not support giving directors unlimited discretion to increase the number of shares that may be issued without the consent of shareholders. In this context, the term shares refers to shares, share warrants, or bonds that can be converted into shares. Some jurisdictions allow companies to issue unlimited numbers of shares. Often, this is a provision of the jurisdiction s corporate law or part of a company s charter, and shareholders do not have an opportunity to vote on it. However, if shareholders are given an opportunity to vote on an unlimited share issuance, [the fund] will vote against it. Companies in some jurisdictions routinely place authorizations to issue shares on proxy ballots, regardless of whether or not the company intends to issue any new shares. In these cases, we will not take the frequency of a company s request for share issuances into consideration. Companies in other jurisdictions, including North America, only ask for the authorization to issue shares when they intend to issue shares or anticipate that they may need to do so. [The fund] will consider the frequency with which the company requests share issuances in determining how to vote on these requests. Share issuances should be made at the market price for the shares at the time they are issued. However, shares issued at a discount and with pre-emptive rights can benefit shareholders and allow a company to raise capital quickly and inexpensively. In these cases, [the fund] will support issuances of discounted shares, as long as the issuance is open to all shareholders. It will oppose any other issuances of discounted shares. [The fund] will vote against proposals to issue shares where the potential aggregate dilution is more than 20%, unless the company provides an acceptable business case for issuing additional shares. This includes proposals to create authorized or conditional capital. [The fund] will vote against proposals to issue shares where the number of shares to be issued is not specified or is unlimited. [The fund] will vote against proposals to issue shares if the shares will be issued at a price that is less than the shares market price at the time of issue, unless the shares have pre-emptive rights and the issuance is open to all shareholders. [The fund] will vote against share issuances that could be used as a takeover defence. [The fund] may also vote against share issuance proposals if doing so is warranted by the reasons given for the requests. Pre-emptive rights Outside of North America, companies often issue shares with pre-emptive rights, which allow shareholders to share proportionally in any new issuances of shares in the same class as the shareholders already own. Pre-emptive rights make share issuances less dilutive for existing shareholders. [The fund] will vote for proposals to issue shares with preemptive rights if the potential aggregate dilution is 50% or less, or if the company provides a sound business reason for the issuance. [The fund] will vote against share issuances with preemptive rights if the amount of shares to be issued is not specified. Waiving pre-emptive rights Companies that issue shares with pre-emptive rights sometimes ask their shareholders to waive their pre-emptive rights. Share issuances without pre-emptive rights are more dilutive to existing shareholders than issuances with pre-emptive rights. [The fund] will vote for waiving pre-emptive rights, but only with a lower limit on the size of the issuance. Share issuances without pre-emptive rights must have the same limitations on dilution, authorizations, and price as share issuances without pre-emptive rights, which are described above. [The fund] will vote against proposals that ask shareholders to waive their pre-emptive rights if the company does not specify the number of shares affected. [The fund] will vote against proposals that ask shareholders to waive their pre-emptive rights if the number of shares constitutes more than 20% of share capital, unless the company gives a sound business reason for asking for a larger proportion. 11 MODEL PROXY VOTING GUIDELINES 2017

12 [The fund] will vote against proposals that ask shareholders to waive their pre-emptive rights if the shares without rights will be discounted below their market value at the time of issuance. Under corporate governance standards in the UK, companies may increases the number of shares without pre-emptive rights, with shareholders approval, by no more than 5%. Companies may ask their shareholders to approve an additional 5% increase but only if the additional shares are used for an acquisition or a specific capital investment. Unfortunately, at least one company has abused this by using the 10% increase in shares for other purposes. If a company in the UK asks for authority to increase its shares by 10% without pre-emptive rights, but uses more than 5% of that increase for a purpose other than an acquisition or specific capital investment, [the fund] will vote against the entire board at the next opportunity. Issuances of blank-cheque preferred shares Blank-cheque preferred shares give the board of directors broad discretion to determine the voting, dividend, conversion, and other rights of preferred shares. The board may also have discretion to determine the number of preferred shares to be issued. [The fund] opposes the issuance of blank-cheque preferred shares because such shares give directors complete discretion over the conditions of the issuance and because they can be used to thwart a takeover bid without presenting the bid to shareholders. [The fund] will vote against the authorization of blankcheque preferred shares. Share buybacks or repurchases Share repurchases tend to benefit shareholders in the short term, but they can be detrimental to companies in the long term. Share buybacks allow shareholders to sell their shares back to the company at a good price and usually raise the share price, at least for a short time. However, repurchases also have undesirable consequences. The lift in share price that share repurchases provide is not based on improvements in the underlying performance of the company. In addition, the use of surplus cash to buy back shares can add to the volatility of the share price especially repurchases using derivatives. Share repurchases can also inflate the value of stock options, making that form of executive compensation more expensive to the company. Furthermore, if a company uses a per-share measure of executive performance, such as earnings per share, for determining executives bonuses, share repurchases will inflate the company s per-share performance, thereby giving executives an unearned bonus. European companies usually ask their shareholders for blanket authority to repurchase a percentage of the company s outstanding shares (often 10%), with upper and/ or lower limits on prices. Companies may ask for blanket authorization to repurchase a set percentage of their shares as a takeover defence. These requests should be evaluated for their capacity to protect management at the expense of other stakeholders. Companies may also set a very high upper price limit for share repurchases, or not set an upper limit at all. Such proposals could effectively become an authorization to pay greenmail (see Greenmail, page 36). The criteria for determining whether or not the repurchase price is too high depend on the context of the proposal. Thus, these votes must be assessed case by case. In Japan, share buybacks may be used to undo the crossshareholdings that have protected management against takeovers and efforts at corporate reform. In these cases, share repurchases benefit shareholders in the long term, regardless of the market conditions. However, the company should specify the number of shares or the monetary value of the shares it intends to repurchase, so that shareholders can estimate the likely effects of the proposal on their shares. Japanese companies are permitted by law to amend their bylaws to allow share buybacks without shareholder approval. [The fund] is opposed to such amendments. [The fund] will assess share buybacks on a case-by-case basis for their effect on the long-term performance of the company and its stakeholders. [The fund] will vote against proposals to repurchase shares if the company uses per-share measures of executive performance in its executive compensation plans. [The fund] will vote against proposals to repurchase shares if the number of shares to be repurchased is more than 10% of the total shares outstanding or if the company does not specify the quantity of shares to be repurchased. [The fund] will vote against proposals to amend a company s bylaws to permit the company to repurchase its own shares without shareholder approval. [The fund] will vote against proposals to repurchase shares if the repurchases could be made using derivatives. Reissue of repurchased shares Some companies ask shareholders for authority to reissue shares that have been repurchased. This proposal is sometimes referred to as a share reissuance mandate. Companies MODEL PROXY VOTING GUIDELINES

13 may also seek to reissue repurchased shares through a general share issuance that includes authorization to reissue the repurchased shares. Companies may seek to reissue repurchased shares to related parties at a discount. [The fund] is opposed to this practice. [The fund] will vote for proposals to reissue repurchased shares only if the shares will be reissued at their market price. [The fund] will vote against proposals to reissue repurchased shares unless the proposal stipulates that the shares will be reissued at their market price. Proposals to reissue shares will also be subject to the same voting guidelines as other share issuances, including limits on the percent of share capital that can be issued. See Share Issuances, page 11. Stock splits and reverse stock splits Companies usually propose to split their stock when the stock price is high and the company wants to make its shares more affordable. Stock splits increase a share s liquidity. This usually benefits shareholders, as long as all shareholders are treated equally and the split does not result in any additional benefits to company insiders. Reverse stock splits can be more complicated. Companies often propose them when the price of their shares has fallen. Thus reverse stock splits can indicate that a company is having problems that are driving down the value of its shares, which is always a concern for investors. Also, because reverse stock splits lower the number of shares a company has, they can increase executive compensation based on any financial indicator that is measured per share (such as earnings per share). [The fund] will decide how to vote on stock splits and reverse stock splits case by case. Unequal voting shares and dual classes of shares Common stock traditionally carries one vote per share. Companies with dual-class share structures have a class or classes of shares with more than one vote per share. Dual-class share structures allow some shareholders to maintain control of the corporation without holding an equivalent amount of equity. France automatically grants two votes per share to shareholders who own shares for two years or longer, unless the company opts out of this arrangement. These loyalty shares promote long term shareholding, but they violate the principle of one vote per share and give some shareholders voting rights that are not proportional to their investment in the company. [The fund] is opposed to unequal voting rights in most cases, for several reasons. First, they violate the principle of one share, one vote, making it possible for the company to act without the support of a true majority of shareholders. Second, when shares with multiple voting rights are initiated, they are likely to dilute the voting power of shares already issued. Third, it is not in the best interests of the majority of shareholders for one investor or a group of investors to control the corporation without a corresponding financial stake in the company. Finally, companies with dual classes of shares tend to be less profitable in the long term than companies whose shares have equal voting rights. 2 Dual class share structures may be appropriate for new companies that need protection from hostile takeovers or from pressure to produce short-term profits. But these circumstances are exceptional. In these cases the dual class share structure should be eliminated once the company is well-established. [The fund] will vote against the creation, issuance, or continuation of capital structures with common shares that carry unequal voting rights. [The fund] will vote for the replacement of multiple-vote shares with shares carrying one vote per share unless the terms of conversion are more detrimental to the interests of the holders of subordinate voting shares than the continuation of the dual-class structure. For companies where a dual-class structure is already established, [the fund] will vote for proposals for a mandatory review of the share structure and regular reapproval by holders of subordinate voting shares. [The fund] will vote for proposals to opt out of loyalty share programs that give longer-term shareholders more than one vote per share. BOARDS OF DIRECTORS There are two broad types of corporate board structures. Some companies have a unitary board structure, also known as the Anglo-American model. This consists of a single board of directors that is responsible for overseeing the management of the company on behalf of its shareholders. Other companies have two boards. The role and makeup of the boards at dual-board companies varies with the jurisdiction. In some jurisdictions (for example, Japan, Spain and Brazil), companies have a board of directors 13 MODEL PROXY VOTING GUIDELINES 2017

14 similar to the board of a unitary company, and a second board of statutory auditors. The statutory auditors are formally responsible for ensuring that the company s acts are legal and/or that the annual audit is properly conducted. Companies in other jurisdictions (such as Germany) are governed by a board of supervisors that includes employees representatives, and a management board. The board of supervisors chooses the management board, which includes the executive officers and is responsible for running the company. The guidelines below are applicable to all of these types of boards. The role of director is becoming more complex, and the field of corporate governance has rapidly expanded to include areas where directors often have little background. Even knowledgeable directors may find that they need additional training in order to guide the company effectively. [The fund] supports director participation in training programs to improve their performance and the performance of the company. Voting for directors (See also Independent Board of Directors, page 14, and Independent Nominating Committee, page 17.) [The fund] will vote for directors case by case, taking into consideration these guidelines and the long-term performance of the corporation and the directors. The following are reasons, in addition to those listed in the following sections, for [the fund] to vote against management s nominees: The board of directors has consistently not acted on issues that have the support of a majority of shareholders or given an appropriate response to shareholders concerns. This includes management proposals that a majority of shareholders vote against. The board of directors has taken steps to limit shareholders rights without shareholders approval, such as by adopting an exclusive form requirement or advance notice requirements without a shareholders vote. The board of directors consistently acts in the interests of a group of shareholders rather than in the interests of all shareholders. An individual director is not qualified to be a corporate director, or the company has not disclosed adequate information about the director s qualifications. An individual director has a conflict of interest; a conviction for financial, corporate, or securities crime, including insider trading; or a history of serious misconduct, regulatory sanctions, or ethical violations relating to corporate responsibilities. There is evidence that directors have purposely misstated or concealed the financial condition of the company. The board has regularly demonstrated a lack of duty of care, such as approving corporate restructurings that are not in the shareholders best interests or refusing to provide information to which shareholders are entitled. An individual director has served on the board of another company that has demonstrated a particularly egregious failure in its duty of care, and the board has not provided a convincing justification for including this director. [The fund] might vote against a nominee for director for many other reasons. These are addressed in the following sections. As demands grow for companies to operate sustainably, board may find that they need directors who have expertise in areas where expertise was not needed traditionally, such as in environmental matters or in human rights. [The fund] will vote for proposals to add directors to corporate boards who have expertise in areas that the board needs and/or lacks, such as environmental expertise, provided that the proposal is reasonable and directors who are nominated are well-qualified to be corporate directors. Independent boards of directors At companies with a unitary board, the company s management is accountable to the board of directors for how it runs the company. The board of directors is responsible for overseeing management s performance in a way that ensures the long-term, sustainable growth of the company. The board is accountable to the shareholders as owners of the corporation. Directors have a legal obligation to act in the best interests of the company. However, it is difficult for anyone to avoid being influenced by conflicts of interest. This is why boards of directors must as a whole be independent of the company s management. Directors are not in a good position to hold management accountable if they have a relationship to the company other than as shareholders and directors. Two-thirds of the directors on a board should be independent, as defined in the next section. [The fund] will vote for proposals to require two-thirds of directors to be independent. MODEL PROXY VOTING GUIDELINES

15 [The fund] will vote for proposals that increase the number of independent directors on the board, unless two-thirds of the directors are already independent. If two-thirds of the directors are already independent, [the fund] will determine how to vote on each case individually, based on how the proposal will affect the company in the long term. If less than two-thirds of directors are independent, [the fund] will vote against the directors who are not independent. It is often difficult for shareholders to determine whether or not a director is independent. Companies should disclose annually which directors are independent as well as details about the information used to make that determination. [The fund] will vote for proposals to require annual disclosure of which directors are independent and the basis on which the assessment was made. [The fund] will vote against a director if the company does not provide enough information for shareholders to determine whether or not that director is independent. Definition of an independent director It is difficult for shareholders to evaluate the independence of directors. Shareholders are not present at the board s meetings and do not know the directors personally. The information about the directors provided to them by the company does not necessarily tell them how easy it is for individual directors to make decisions without being unduly influenced by management or unduly pressured by other, non-independent directors. Thus, shareholders must rely on less-than-ideal information from the company to assess how likely it is that a director can make independent decisions about the company and its management. If a director might appear not to be independent based on the biographical information provided to shareholders, but the company believes that director is independent, it should provide shareholders with an explanation of why it believes the director is independent. In general, a director is independent if he or she has no material relationship with the company other than that of director and shareholder. This excludes any director who is currently or has been previously employed by the corporation, an affiliate of the corporation, or a company that has acquired by the corporation within the past 5 years; founded the company, individually or with others, if that person also maintains another relationship with the company, such as any of the relationships listed here; holds any contract, agreement or arrangement with the company that pays the director any compensation or benefits, other than the payments that person receives as a shareholder and a director (e.g. dividends and director s fees); receives benefits from the company or compensation as a director in an amount comparable to the base salaries of the highest-paid executives; is currently employed, or has been employed within the last three years, by the company s auditor; is employed by or owns a significant portion of an entity that does business with the company or has an immediate family member who does business with the company, including advisors, consultants, accountants, lawyers, banks, customers or suppliers. However, exceptions should be made for monopolies, such as utility companies, or very large companies that do business with many customers, such as very large banks; has, within the past five years, been an employee or owner of an entity that does business with the company, as described above; serves as a director on the board of a company that has an executive who serves on the board of the director s own company a situation known as an interlocking directorship; is an immediate family member of any of the corporation s executives or management employees; is indebted to the corporation or any subsidiary, except for bank directors with a residential mortgage from their institution with the same conditions and rates provided to other customers; is employed by any organization, including a university or research institute, that receives financial support from the company or has some other close relationship with the company; owns an equity interest in, has extended credit to, or has an immediate family member who owns an equity interest in or has extended credit to an entity over which the corporation or any executive officer of the corporation exercises significant control (significant control should be defined with reference to the contractual and governance arrangements between the corporation or executive officer and the entity); has provided, or has an immediate family member who has provided, any professional services to any executive officer of the corporation in the last five years; or 15 MODEL PROXY VOTING GUIDELINES 2017

16 has any other relationship similar in scope and nature to any of the relationships listed above. Shareholders who hold a significant interest in the company or are affiliated with or designated by a shareholder with a significant interest may also be considered not to be independent. This includes shareholders who hold less than 50% of the company s voting power if they also have business transactions with the company or a relationship to management. The determination of these shareholders or directors independence will be made case by case. The determination will be based on whose interests the shareholder or director is mostly likely to represent, and on whether or not the director or shareholder would have any potential conflicts of interest in serving on the board. Independent chair of the board The chair of the board of directors must be an independent director, as defined above, in order to guide the board in its responsibility for overseeing management s performance. This is a basic tenet of good corporate governance. No one can fulfill the responsibilities of chair and those of a senior management position without potential conflicts of interest. 3 This provision includes the president directeurs general of French companies, because they are effectively both CEO and board chair. [The fund] will withhold votes from directors who are not independent if they are also chair of the board or if, upon becoming director, they would become chair of the board. [The fund] will vote for proposals to require the chair of the board to be an independent director. Independent lead directors Some companies whose board chairs are not independent have sought to address concerns about that arrangement by appointing an independent lead director. However, it is extremely difficult for shareholders to know how much of the chair s job a lead director has assumed, or to what extent the person who still holds the title of chair actually runs the board. Studies have shown that companies where the board is chaired by an independent director perform better than companies where the chair is an executive of the company, even if those companies have lead directors. 4 [The fund] believes that the appointment of an independent lead director may be suitable as an interim step toward making the board s chair an independent director, but it is not a substitute for an independent chair. If a company chooses to appoint an independent lead director as an interim position, that person should serve as lead director for no longer than one year before an independent chair is appointed. [The fund] will not withhold its vote from the chair and CEO of a company if the board has a lead director who is independent (according to the definition in these guidelines) and the position of lead director will exist for no longer than one year, or if there is another compelling reason to accept a lead director in place of an independent board chair. [The fund] will vote for proposals to create an independent lead director position as long as the position exists for no longer than one year. Key board committees All boards of directors should have audit, compensation, and nominating committees made up entirely of independent directors. These committees are essential in overseeing a company. They are also in the best position to prevent corporate malfeasance and protect the value of the company. 5 Supervisory boards often have committees. These are discussed in the section on supervisory boards. Independent audit committee A board of directors should have an audit committee that is responsible for oversight of the annual external audit of the corporation. This is required by American and Canadian securities law. All members of the audit committee should be independent directors. The committee members should be free of ties to the company s auditor, including employment with the audit firm within the last three years. Members of the audit committee need to be financially literate in order to oversee the complexities of the annual audit and to deal with the technical aspects of financial information. [The fund] will vote for proposals to create audit committees in which all of the members are independent. [The fund] will withhold its votes from individual directors who are not independent and who sit on the audit committee. Independent compensation committee Every board should have a compensation committee that is responsible for the direction and oversight of the company s executive compensation program and for regularly evaluating the performance of senior management. In order to be effective and avoid conflicts of interest, this committee must be made up entirely of independent directors. Directors who MODEL PROXY VOTING GUIDELINES